OPEC, in cooperation with Russia, are currently discussing the option to put another production cut in place.

OPEC, in cooperation with non-OPEC member Russia, are currently discussing the option to put another production cut in place. During the recent Joint Ministerial Monitoring Committee meeting of OPEC ministers in Abu Dhabi, a consensus was formed between an overwhelming majority of its members that the current oil market situation again substantiates a production cut in 2019.

As stated before the implementation of the U.S. sanctions on Iran and the Midterm 2018 elections in the United States, Saudi Arabia, UAE and non-OPEC member Russia are worried about a new oil glut in the market if no proactive measures are taken. A possible 1-million barrels per day (MMbpd) production cut already is in the offing to stem the perceived oil glut currently building. Some even expect that a production cut will be necessary above this initial figure. Looking at the current buildup this could reach a level of 1.5-2 MMbpd if no other actions are taken.

Saudi Arabian, Russian and Emirati oil officials will do more market analysis in coming weeks, as it is still unclear what the effects will be of the Iran sanctions being put in place by the Washington Administration. An effective U.S. sanctions regime is expected to bring Iranian exports below the 1 MMbpd level, but at present this hasn’t been reached. Iran’s pro-active production and export strategy, which was boosted by a silent increase in export volumes, has been partly behind the current increase in oil volumes in the market.

China and others have been taking in additional volumes, which were not being reported. Saudi Arabia and Russia, supported by the UAE and others, also have been trying to grab part of the Iranian oil market in a response to the U.S. sanctions. The Kingdom has also been politically correct in showing its willingness to support U.S. President Trump’s calls for production increases by opening up the taps. However Riyadh, Abu Dhabi and Russia could have been playing a political game by partly supporting Trump’s call for lower oil prices, in a move to give him an election boost during the 2018 Midterm Elections. This is at present in the past, and Riyadh even unilaterally stated that it already is cutting exports by 500,000 barrels per day this month, with possible other cuts being considered.

The perceived oil glut, which has resulted in an oil price decline of around $15 per barrel in recent weeks, combined with possible lower demand growth in emerging markets, is behind the current production cut discussion again. OPEC and Russia, even partly supported by Iran, are not willing to again take the pain of lower revenues and a destabilized oil market. The JMMC meeting in Abu Dhabi has shown that the major oil exporters have learned from the last oil glut situation.

Khalid Al Falih and Russia’s Novak have already been discussing a possible schedule for new production cuts. The gloves will be off again, and Big Oil is looking for a continuation of its market dominance, whatever Washington, Beijing or New Delhi are stating. The market will see a new OPEC-Russia coordination before the upcoming Dec. 6-7 OPEC meeting in Vienna, when at the same time a possible new oil cartel is being discussed. NOPEC’s future is being decided at present, and with a big bang, if production cuts are put in place in full again very soon. The current bearish mood in the market will disappear soon if NOPEC becomes pro-active again.

With a new production cut, slower demand growth will be mitigated, but this could lead to possible supply shortages in 1H 2019. The fight of the Bulls and Bears is not yet over, but an OPEC winter is approaching, leaving Bears to go on and hibernate again. Possible new developments are expected very soon, as OPEC and non-OPEC ministers are flocking to conference rooms in Abu Dhabi as the Middle East’s largest oil and gas conference and exhibition, ADIPEC, is also underway. Cuts and strategies will certainly be discussed during the coming days, with possible unexpected moves to follow.

Cyril Widdershoven has been a Middle East specialist and energy analyst for over 25 years. He works and lives in the MENA region, while currently heading VEROCY, a Dutch consultancy. Reach Cyril at cwiddershoven@hotmail.com.

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